Download The Internationalization of Emerging Economy

（NO.2, 2012）
October 12, 2012
The Internationalization of Emerging Economy Currencies
Some Thoughts on the Internationalization of the Chinese Renminbi,
Brazilian Real, and Russian Ruble
Akira Nakamura
Deputy General Manager and Senior Economist, Economic Research Department
[email protected]
Kenji Ueda
Lead Economist, Emerging Economy Research Department
[email protected]
Kenichiro Matsui
Lead Economist, Emerging Economy Research Department
[email protected]
The Institute for International Monetary Affairs
＜Summary＞
1. The Chinese renminbi (RMB) is becoming increasingly internationalized at a steady pace in
a number of ways, with more RMB-denominated Chinese trade transactions and
increasingly widespread direct exchanges with other currencies. Further, the currencies of
other BRIC countries, including the Brazilian real (BRL) and the Russian ruble (RUB), are
also gaining a greater presence in international markets, however slowly. The currencies of
these three countries, the RMB, the BRL, and the RUB, are expected to become more
widely used in the economies of their respective regions, in which economies are highly
interdependent.
1
2. On the other hand, although the Japanese yen (JPY) has been internationalized for years as
the sole hard currency used in Asia, the currency has not gained sufficient status as an
international currency despite the efforts of the country. Even though Japan is already one of
the world’s major advanced economies, the JPY’s internationalization has not been
commensurate with the scale of the country’s economy.
3. This has been due to three factors: 1) Japan’s economy has struggled since the 1990’s, and
dependence on and confidence in the Japanese economy has waned as the economies of
other Asian countries have grown stronger; 2) international transactions of commodities,
which comprise a large portion of Japanese imports, are customarily denominated and
settled in USD; and 3) Japanese financial and capital markets are not especially convenient
for foreign exchange settlements because of the time difference with Europe and the US.
Further, JPY-denominated settlements and JPY-denominated outward capital transactions
that supply JPY funds abroad have not been expanded, and sufficient JPY assets have not
accumulated overseas, primarily in Asia.
4. As such, Asia-Pacific emerging super-powers China and Russia—both important economic
partners for Japan—are trying to internationalize their currencies. Japan must strengthen
mutual cooperation in financial and foreign exchange transactions with both
countries—with which mutual economic dependency is expected to grow—through
currency swap agreements and other means.
5. Furthermore, extending financial mutual cooperation frameworks to other emerging
countries in the Asia-Pacific region through the Asia-Pacific Economic Cooperation
(APEC) framework would likely contribute to the stability of the region’s financial markets
and currency systems. Through such actions, Japan must be actively involved with such
efforts. Japan’s participation could re-ignite the internationalization of the JPY, which had
stalled.
Introduction
The Japanese and Chinese governments have agreed to bolster mutual cooperation in the
financial markets and promote financial transactions between the two countries. One of those
efforts, the introduction of direct trades between the JPY and RMB, began in June on the Tokyo
and Shanghai markets. China’s currency is steadily internationalizing in a number of ways,
including through increased RMB-denominated transactions in Chinese trade and greater
issuances of RMB-denominated bonds in Hong Kong. Further, the currencies of other BRIC
countries, including the BRL and the RUB, are becoming increasingly visible in international
markets, however slowly. Why are the currencies of these three emerging economies
internationalizing, and what are their economic linkages? Furthermore, what will future
2
developments bring? On the other hand, Japan has long worked to internationalize the JPY but
has not been especially successful. This report will review the case of the JPY and address the
outlook for these emerging country currencies based on recent developments.
1.
Currency Internationalization: Some Points
1‐1．Defining Currency Internationalization
When the currency of a given country internationalizes, that currency is generally used
more widely around the world. In particular, 1) the use of the country’s currency becomes
increasingly frequent in outward transactions like foreign transactions including trade, foreign
direct investment, and securities investing. Also, 2) the currency comprises a greater share of
foreign currency reserves of other countries. According to the definition of currency
internationalization in a 1999 paper by Japan’s Ministry of Finance, The Internationalization
of the Yen for the 21st Century, both the use of the currency in cross-border transactions and
overseas transactions and the share within asset holdings by non-residents increases.
As such, internationalizing does not necessarily mean expanded usage throughout the entire
world, but rather usage spanning borders and among countries and regions with strong
economic interdependence. As such, the internationalization of a currency does not mean that
a currency becomes a key currency.
1‐2．The Merits of Becoming an International Currency
The internationalization of a currency offers merits for the home country in terms of private
sector economic activity, both during ordinary and extraordinary times. First, during ordinary
times, the internationalization of a country’s currency: 1) reduces the risk of exchange rate
fluctuations in trade; 2) makes financial institutions more competitive internationally; and 3)
contributes to the development of financial and capital markets.
In regard to the first merit, 1) reducing the risk of exchange rate fluctuations in trade,
companies bear less risk of exchange rate fluctuations particularly when trade and settlements
are conducted in the currency of the home country.
Further, 2) the competitiveness of financial institutions strengthens when the home country
currency is used more widely in financial transactions, which is significant for the treatment
of the country’s currency. Under these circumstances business opportunities are likely to
increase. Furthermore, liquidity risk related to raising funds in foreign currencies is alleviated
for financial institutions as a country’s currency internationalizes. As a result, this 3)
contributes to the development of the country’s financial and capital markets.
3
On the other hand, internationalized currencies are also advantageous during extraordinary
times. The impact of exchange rate fluctuations for key currencies the USD and EUR as well
as other major currencies diminishes. The value of the USD and EUR fluctuated wildly during
the global financial and debt crises after the collapse of Lehman Brothers in 2008, and
shortfalls of liquidity frequently arose. Although the impact from fluctuations in these
currencies could not be completely eliminated, the use of a home country currency or more
direct transactions in currencies other than the USD and EUR may have reduced impacts in
the event of similar crises in the future. Furthermore, alleviated exchange rate fluctuation risk
for emerging countries from a currency’s internationalization could contribute to the stability
of the region’s finances and by extension international finance.
On the other hand, there are demerits associated with the internationalization of a currency.
As a country’s currency is used by economic entities in other countries, speculative funds
could flow into the home country through external transactions, and the country’s financial
markets could become less stable. This was why regulations that constricted capital
transactions were introduced by China while RMB trade transactions are liberalized. However,
not only is it difficult to distinguish between funds backing actual transactions and speculative
funds, as the cases of advanced economies show, in fact some amount of speculative money
must flow in and out due to the depth of financial and capital markets. Because of this, the
soundness of financial systems must be bolstered as a country’s currency becomes
increasingly internationalized, as discussed hereafter.
1‐3．Conditions for Becoming an International Currency～Currency Liberalization and
Internationalization
There are two preconditions for a currency to internationalize. One is the development of a
country’s economic activities, particularly outward trade, to a certain level within the world or
a given region. In order for this to happen, economic mutual dependence with the relevant
region must increase and cross-border transactions—current transactions and capital
transactions (primarily trade)—must expand.
The second precondition is the absence of restrictions or regulations in usage of a country’s
currency in activities; that is, the liberalization of the currency. Further, there must be an
absence or minimum of regulations on the country’s currency for cross-border current and
capital transactions. If such regulations do exist, they must be either eased or lifted.
Furthermore, in order for a currency to be used by the economic entities of other countries,
domestic financial and capital markets must be equipped and open in order for economic
entities both within and outside the country to make financial and capital transactions.
Specifically, 1) interest rates and financial services must be liberalized; 2) interest rate and
4
exchange rate futures markets must be established; and 3) short-term financial markets and
bond markets must be nurtured. The establishment and liberalization of such domestic
markets improve the competitiveness of financial institutions by promoting open and
competitive markets, and this results in the ability of domestic financial and capital markets to
handle expanded capital inflows and outflows anticipated after the currency becomes more
international. Liberalizing outward transactions while these preconditions were unmet proved
to be one of the causes of the Asian currency and financial crisis of 1997-1998 and is one of
the most important lessons from recent years.
1‐4．Internationalization of the JPY and Developments around the World
（1） Internationalization of the JPY
This section reviews the efforts and developments in internationalizing the JPY and
compares these with emerging economies’ current conditions. Following the complete
overhaul of the Foreign Exchange and Foreign Trade Control Law of 1980, foreign
transactions were liberalized in principle, and greater efforts to internationalize the JPY were
made. These efforts further accelerated in the mid-80’s, and in May 1984, the US-Japan
JPY-USD Committee, which had been established in 1983, released its Report on JPY-USD
Exchange Issues. The Finance Ministry also released a report on the current conditions and
outlook regarding financial liberalization and the internationalization of the JPY. Both projects
were intended to internationalize the JPY and liberalize finance at the same time. The
internationalization of the JPY and financial liberalization domestically were integrated, and
both efforts were promoted at the same time.
The JPY became increasingly internationalized as a result of these efforts, as described
below. In short, the JPY internationalized, though not significantly, with 1) trade current
transactions, 2) capital transactions and 3) government reserves.
JPY-denominated trade, highly relevant to corporations, especially import- and
export-related companies, started to increase in the 1970s. However, expansion moderated in
the early 1990s. Figure 1charts the ratio of JPY-denominated transactions in Japanese trade,
Japan’s share of total world trade and nominal GDP, and the USD/JPY exchange rate. The
ratio of JPY-denominated transactions in trade rose from the 1970s through the 1980s as
Japan’s share of the world economy expanded and the JPY strengthened against the USD.
However, this ratio peaked at 33.5% in 1993, then leveled off thereafter.
5
Figure 1: Japan’s JPY-Denominated Trade Settlement Rate and Share of World Trade and Economy
40(%)
35
（Yen／Dollar）
The percentage of JPY used as invoice currency in international trade
400
Share of the world GDP
350
Share of the world trade
Yen/Dollar(right scale)
30
300
25
250
20
200
15
150
10
100
5
0
50
75 80 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
0
（year）
Source: METI, MoF, IMF materials.
Further, Japan lagged behind the US, whose USD was a key currency, and even Germany
and France, in own-currency-denominated trade transactions at peak periods (Figure 2).
Figure 2: Share of Trade Settlements Settled in Own-Country Currency
Japan
U.S.
Germany
France
1993
1988
1995
1997
Export
43
96
75
49
Import
18
85
52
47
Source: MITI, Survey of Import Export Settlement Currency, country data.
Figure 3 shows bond issuances by different types of denominations. The amount of
JPY-denominated bonds outstanding lags well behind the amount of USD- and
EUR-denominated bonds. JPY-denominated bonds outstanding do not comprise even half the
amount of GBP-denominated bonds; rather, the scale is on par with CHF- and
AUD-denominated bonds.
Furthermore, the ratio of JPY holdings in the world’s foreign currency reserves is extremely
small. Figure4 shows the shares of individual currencies in foreign reserves held by central
banks around the world. As of end-2011, JPY holdings comprised a mere 3% of central bank
foreign reserves. Shares of USD and EUR holdings are large, with the JPY ranking fourth
behind the GBP. In the mid-1970s, the JPY holdings ratio was a low 2%, then hit 8% in 1991
6
as Japan’s economic presence expanded. Thereafter, however, JPY holdings have once again
sunk to low levels because of the Japanese economy’s weakness as well as the launch of a
unified currency in Europe.
Figure 3: Global Bond Issuances, by Currency (Dec 2011)
Figure 4: World Foreign Currency Reserves by Currency
(end-2011)
（Bil. US dollar）
14000
3% 7%
5%
12000
10000
US dollar
Euro
8000
27%
6000
4000
58% Japanese Yen
2000
0
Pound sterling
US dollar
Euro
Pound sterling Japanese Yen
Others
Switzerland Australia dollar
franc
Source: Bank for International Settlements.
In this way, even though Japan was already one of the world’s advanced countries, the
reasons the JPY did not internationalize as much as the scale of the country’s economy would
indicate are summarized in the three points below.
First, Japan’s economy was very weak from 1990 onward, and the presence of and
confidence in Japan’s economy diminished as the economies of other Asian countries emerged.
Second, international transactions of commodities, which comprise a large portion of Japan’s
imports, are customarily denominated and settled in USD. Third, although language
restrictions are improving, Japan’s financial and capital markets cannot be considered
user-friendly because of the impact of time differences with the US and Europe on foreign
exchange transaction settlements.
Of course, in fact the JPY did play an important role as the only hard currency in Asia for a
long while. But even despite the country’s expanding economic presence, JPY-denominated
import settlements and JPY-denominated outward capital transactions, both of which supply
JPY funds overseas, did not take off, and there were insufficient stockpiles of JPY assets
overseas, primarily in Asia. Also, the JPY was not adequately supplied to Asian countries
during the Asian currency crisis of 1997-1998 either publicly or privately. This was likely a
missed opportunity for the JPY to internationalize further.
University of California-Berkeley professor Barry Eichengreen wrote in Exorbitant
Privilege (2011) that Japan’s financial liberalization policies of the 1980s intended to
internationalize the JPY were not as effective as hoped, and rather caused the subsequent
7
bursting of the economic bubble as Tokyo failed in its bid to become a center of international
finance. According to Eichengreen, both domestic and foreign financial markets were
liberalized as part of Tokyo’s efforts to become a center of international finance in the 1980s
as the JPY was being internationalized. Financial liberalization eased capital market financing
for large companies, but on the other hand, banks lost major customers and aggressively
financed the real estate industry. This led to the formation and subsequent bursting of a huge
asset bubble. Because of this, Tokyo was unable to rise beyond a second-tier international
financial center. Although this view is partially correct, it may be an exaggeration to suggest
that the entire reason for the failure of the JPY to internationalize was financial liberalization
that caused the economic bubble and subsequent collapse and the plunge of the Tokyo
financial markets.
（2） Current Conditions in China, Brazil, and Russia
The following points compare the current economic scales and size of trade and capital
transactions of China, Brazil, and Russia to Japan in the 1980s, when the JPY began to
internationalize (Figure 5).
Because all are nominal figures, comparisons with figures from thirty years ago are difficult,
but China’s nominal GDP and shares of global exports and imports are already about the same
level or higher than Japan’s in 1980. Both inward and outward direct investment flows are
similarly difficult to compare, but China and Russia’s outward and inward direct investment,
and Brazil’s inward direct investment, exceed the levels of Japan in 1980. The macro
economies of the three countries are already meeting one condition of internationalizing
currencies, even more so compared to Japan.
Figure 5: Key Data: Japan, China, and Russia (2011)
Nominal GDP
(shares of global GDP)
Exports
(shares of global Exports)
Imports
(shares of global Imports)
FDI outflows
FDI inflows
Portfolio invest. outflows
Portfolio invest. inflows
China
7,298
10.2
1,899
10.6
1,743
9.4
65
124
8
32
Brazil
2,475
3.4
256
1.4
226
1.2
-1
67
5
68
（Bil US dollar,％）
Russia Japan （1980） Japan （2011）
1,850
1,087
5,869
2.6
10.2
8.2
516
127
821
2.9
6.5
4.6
305
125
853
1.6
6.2
4.6
67
2
114
53
0
-2
3
4
57
2
11
-1
Note: Outward and inward securities investment data from 2010.
Source: IMF IFS.
8
Restrictions and regulations regarding the use of own-country currency for external
transactions as well as the development and liberalization of domestic financial and capital
markets vary among the three countries. That said, none of the countries are considered to
have established sufficient frameworks. As described below, not only does China strictly
manage capital transactions, but the country is only halfway toward liberalizing its domestic
financial markets. Further, Russia’s current and capital transactions were both liberalized at a
relatively early stage, but the central bank has continued aggressive intervention even after the
exchange rate system was changed to a floating exchange rate. This is expected control
market levels.
1‐5．Declining Confidence in the USD and Reassessing the International Currency System
China, Brazil and Russia are not only continuing their efforts to internationalize their own
currencies, but there is a growing movement among the BRICs as a whole, including India, as
well as a number of emerging countries, to break away from the USD. These countries are
increasingly vocal as their own economic power grows, and in particular China has starting to
actively voice negative views regarding the state of the international currency system since the
global financial crisis of 2008. One pivotal event occurred in March 2009, when People’s
Bank of China Governor Zhou Xiaochuan delivered a speech highlighting the problems with
the existing international currency system in which the USD is a key currency. He called for
broadening SDR functions to make it a reserve currency. Although his calls themselves are
unlikely to be realized anytime soon, economic powerhouse China’s pointing out the
limitations of the USD, the currency of the United States, and proposing strengthening the
functions of the SDR, which is managed by the IMF, came as a shock to the international
financial world. Since then, arguments to reform the international currency system have arisen,
and IMF staff have released reports on reforming the international currency system. A number
of prominent US researchers and economists, including Director of the Peterson Institute for
International Economics Fred Bergsten, UC Berkeley professor Barry Eichengreen and
Columbia University professor Joseph Stieglitz, have offered proposals regarding the current
international currency system.
Even in 2012, the BRICS (including South Africa for a total of five countries) have
continued to actively debate international currency and finance. In March, a special meeting to
discuss extraordinary currency issues was held at the World Trade Organization meeting at the
proposal of Brazil. The BRICS meeting yielded an agreement to consider the creation of a
‘BRICS Bank’ to support infrastructure and other projects in developing countries and funded
by related countries. Events in these countries will continue to bear watching.
9
Developments for the currencies of China, Brazil, and Russia are described below.
2.
China RMB
2‐1． Recent Developments in the Internationalization of the RMB
(1) RMB Settlements of Cross-Border Trade
In 1996, China accepted Article VIII of the IMF Agreement, and current transactions were
liberalized in principle. However, the RMB remained basically unusable in cross border
transactions and settlements overseas 1.
In July 2009, China introduced a pilot program to allow RMB-denominated trade
settlements by the People’s Bank of China and related institutions. The program allowed pilot
companies in Shanghai and four cities in Guangdong Province to settle trades with Hong
Kong and ASEAN trading partners in RMB. In June 2010, the framework was broadened to
include trade by companies in 20 provinces, autonomous zones, and directly-governed
municipalities (exports were limited to the pilot companies) with the entire world. The
program was expanded even further thereafter, and now companies in all regions of China
with the right to foreign trade are allowed to make cross-border trades denominated in RMB.
Further, when RMB cross-border settlements were first approved in July 2009, transactions
that could be settled in RMB were limited to trade transactions. However, from June 2010 the
scope of transactions allowed was expanded to include all current transactions including
services transactions.
The China Monetary Policy Report, released by the People’s Bank of China, revealed that
cross-border settlements denominated in RMB rose 3.1x on-year to RMB2.8trn in 2011, to
one-tenth of all Chinese trade value (Figure 6). However, according to Q3 2011 data, in fact
90% (in terms of value) of RMB-denominated cross-border settlements were made with Hong
Kong. RMB-denominated cross-border settlements totaled RMB583.4bn, and of this
RMB525.4bn was with Hong Kong as trading partner.
1
This report uses the term ‘overseas’ for expediency. Here, the term ‘overseas’ includes both outside the nation of
China, as well as Hong Kong and Macao. Conversely, the term ‘domestic’ does not include Hong Kong and Macao.
10
Figure 6: RMB-Denominated Settlements of Cross-Border Trade
RMB100mn
Source: China Monetary Policy Report (Q4 2011), People’s Bank of China.
(2) Offshore RMB Markets
The RMB is circulating overseas increasingly as the currency internationalizes. Markets are
competing around the world to become offshore RMB markets that handle overseas RMB
transactions.
Hong Kong enjoys the advantage of being a Chinese territory despite treatment as a foreign
country in terms of foreign exchange management, and the bulk of RMB circulating offshore
is through the Hong Kong market. Hong Kong was a test market as an offshore RMB market
and the prohibition against RMB trading was lifted here first; Hong Kong handles much more
RMB transactions than other markets. Hong Kong allowed RMB business dealings for
individuals in 2003, and RMB deposits and credit card businesses were introduced. Thereafter,
RMB cross-border trade settlements began in 2009, and the Hong Kong Monetary Authority
greatly eased regulations covering RMB transactions in July 2010. As long as money flows
into Mainland China did not occur, the RMB could now be handled in the same manner as
other currencies in principle. The following month, foreign exchange and fund transactions
were established for Hong Kong’s interbank market, and the offshore RMB market was
launched. The Hong Kong market is said to handle approximately RMB15.0bn of USD/RMB
transactions, more than 10x the scale of JPY/RMB transactions on the Tokyo market. Further,
RMB deposits have surged since mid-2010 in Hong Kong and totaled more than
RMB563.2bn (JPY6.9trn) as of July 2012. A variety of RMB-denominated financial
instruments are now structured and sold, including Dim Sum Bonds (RMB-denominated
bonds) for both Hong Kong companies and non-residents. Dim Sum Bond issuances totaled
RMB107.9bn (JPY1.3trn) in 2011.
11
Figure 7: Hong Kong RMB Deposits
(REM Bn)
700
600
500
400
300
200
100
0
2009
2010
2011
2012
Source HKMA
Source: Hong Kong Monetary Authority.
Singapore and London have both launched bids to become the second-biggest offshore
RMB market after Hong Kong. The governments of the UK and China agreed in September
2011 to cooperate in the development of an offshore RMB market in London, and HSBC
reportedly announced the issuance of RMB-denominated bonds in London, the first
RMB-denominated bonds outside the Hong Kong market, in April 2012. The governments of
Japan and China reached an agreement at the end of 2011 to strengthen financial cooperation,
specifically by developing an RMB offshore market in the Tokyo market, as described below.
These efforts are part of strategies to energize their own markets through the
internationalization of the RMB.
Figure 8: RMB-Denominated Bond Issuances in Hong Kong (major issuers)
Year
Non-residential
Amount
RMB bn
Main Issuers
Residential
2007
China Development Bank, The ExportImport Bank of the ROC, Bank of China
－
10
2008
China Development Bank, The ExportImport Bank of the ROC, Bank of China
－
12
2009
Ministry of Finance of PROC, China
Development Bank, HSBC China, Bank of
East Asia China
－
16
2010
Ministry of Finance of PROC, China
Development Bank, The Export-Import
Bank of the ROC, Bank of China,
SINOTRUK、China Resources Power
ADB, Hopewell, McDonals, Caterpillar
Inc, Galaxy Entertainment, SINOTRUK
HK, China Resources Power, UBS, ANZ
35.76
2011
Ministry of Finance of PROC,
SHOUGANG、Baosteel, LDK Solar HiTech
World Bank, ADB, The Export-Import
Bank of Korea,The Korea Development
Bank、BMW AUS Finance, BP, Tesco,
Caterpilla, Volkswagen, Unilever, ORIX、
IDBI、ICBC Asia
100
2012
Ministry of Finance of PROC, China
Development Bank, Agricultural Bank of
China, Baosteel, Huawei Technologies
Ford Motor Company, Caterpilla,
Mitsubishi UFJ Lease & Finance、
Mitsui&Co, Lotte Department Store,
Hainan Airlines HK
N.A.
Source: Hong Kong Monetary Authority, Reuters.
12
2‐2．The Outlook for the Internationalization of the RMB
(1) Internationalization of the RMB: Developments
China has in the past severely restricted cross-border capital transactions, including foreign
currency transactions. China learned from the debt crisis of Central and South America of the
1980s and adopted a strategy of aggressively promoting inflows of non-debt direct investment
while severely restricting debt capital, including securities investments and loans from foreign
countries. Recent balance of payments crises have been caused more by the sudden
repatriation of funds overseas, rather than by difficulties in financing current account deficits.
China adopted a strategy to strongly resist pressure to suddenly withdraw funds, and as a
result, various periods of economic turmoil abroad have had a relatively limited impact on the
domestic economy. China stood out among Asian countries in avoiding a currency and
financial crisis during the Asian currency crisis of 1997-98. Furthermore, the global financial
crisis touched off by the 2007 subprime crisis in the US did not cause a crisis for China’s
domestic financial sector. These were the largely the results of strict financial regulations.
However, the exchange rates of major currencies like the USD and EUR have fluctuated
wildly since 2008 because of the global financial crisis. China recognized the risk of excessive
dependence on the USD for trade. Promoting RMB settlement of cross-border trade would not
only help Chinese companies avert exchange rate risk and reduce foreign exchange losses, but
also reduce exchange rate risk factors for foreign currency external assets like foreign
currency reserves. Furthermore, Chinese financial institutions would likely benefit from
expanding business and improved competitiveness. This would also support the construction
of an international financial center in Shanghai, proposed by the Chinese Government and
slated for completion in 2020. In sum, as the economy expanded, the severe restrictions on
using the RMB abroad were squelching economic activity, and this led to some of the
developments noted above.
The Chinese Government has been diversifying from usage of the USD in external
transactions and has proposed promoting own country-currency settlements in bilateral trade
in a number of arenas. A meeting of heads of state of the BRICS (Brazil, Russia, India, China,
and South Africa) was held in April 2011 in Hainan, China. A memorandum on financial
cooperation in BRICS government-affiliated bank cooperation mechanisms was drawn up,
proposing the gradual expansion of trade settlements in own-country currencies by the BRICS
and improved convenience in trade and investing. Furthermore, the joint statement released
after the Fourteenth ASEAN + 3 (China, Japan, and South Korea) meeting of financial
ministers in Hanoi in May 2011 included an agreement to study the possibility of allowing
own-country currency settlements for imports and exports among China, Japan, and South
13
Korea. In New Delhi this past March, the China Development Bank agreed to provide RMB
financing for development banks in the BRICS countries in order to promote the use of the
RMB in trade and investments among the BRICS. One financial institution projects that these
efforts will result in the ratio of RMB-denominated settlements in Chinese trade with Asia to
reach 50% by 2015.
(2) A Master Plan for Internationalizing the RMB
Chinese monetary authorities have indicated that they plan to ease regulations on RMB
capital transactions in stages. A February 2012 report by the survey statistics department of
the People’s Bank of China on the basic conditions for accelerating Chinese capital accounts
serves as a reference.
Chinese monetary authorities had not laid out a precise timetable for liberalizing RMB
capital transactions, and the report is the first indication of a schedule: 1) Regulations on
direct investment will be loosened over the short term (one to three years), and foreign direct
investment by Chinese companies will be promoted; 2) Regulations regarding commercial
loans, which support the real economy through trade, will be loosened over the medium term
(three to five years), promoting the internationalization of the RMB; and 3) the financial
markets will be developed over the longer term (five to ten years). Real estate, stock, and
bond transactions will first be liberalized at a careful pace. The report notes that short-term
external debt, which is speculative in nature, will not be liberalized for some time.
Recently regulations regarding RMB capital transactions have been loosened gradually as a
result. More detailed changes are described below.
In August 2010, the People’s Bank of China allowed overseas central banks and overseas
banks participating in RMB settlements to use RMB to invest in securities that are traded
among domestic banks like Chinese government bonds. This allowed the use of RMB for
securities investment flowing into China among cross-border capital flows. (But the RMB that
could be used was limited to RMB funds sent overseas from within China through currency
swap agreements among central banks and RBM cross-border settlements. RMB already in
circulation abroad and from new purchases from foreign exchange transactions could not be
used.)
In January 2011, the People’s Bank of China promulgated a regulation on managing RMB
settlements in outward direct investment that allowed RMB-denominated outward direct
investment from China. At the same time, RMB-denominated loans to companies in which
direct investments are made were allowed within the allowed direct investment amount.
In October 2011, the Chinese Ministry of Commerce announced a regulation on
cross-border RMB direct investment issues, and the People’s Bank of China issued a
14
regulation on managing RMB settlement for direct investment in foreign businesses. These
allowed overseas investors to make inward direct investments into China with RMB. At the
same time, loans from abroad (foreign debt) were also allowed.
(3) Internationalization of the RMB: Major Issues
As described above, although the RMB is steadily internationalizing not only with current
transactions but also with capital transactions, a number of issues remain. Chinese authorities
have stressed three principles in implementing currency policy: ensuring independence
(meaning at China’s own pace), manageability, and a gradual pace. Because of this, the RMB
is expected to internationalize and liberalize in steps and cautiously.
Generally, liberalization of domestic interest rates is considered a prerequisite for loosening
capital transactions. Liberalizing capital transactions without first freeing domestic interest
rates could cause funds to flow inward from offshore in a manner domestic authorities cannot
control, possibly stoking inflation and the formation of bubbles. Conversely, capital flight
outward could be encouraged. Sequencing is important in financial liberalization overall, and
this must be executed cautiously and in steps while carefully watching the impact on other
policies. However, domestic financial reform has not made particular progress because of the
stubborn resistance of vested interests. Chinese authorities are also highly sensitive to
confusion caused by liberalization.
The foreign exchange rate system must become more flexible in order for RMB usage to
expand. RMB markets are slowly becoming more flexible, and there are some views that
because it is clear that the other side of trade would suffer losses from using the RMB in
settlements (the overseas side for exports from China and the Chinese side for imports into
China), a mutual agreement will not be reached and as a result the RMB will not be used more
widely as expected. In order to prevent such problems, the RMB exchange rate must be made
more flexible to prevent expectations that the RMB will continuously rise. The RMB will not
be more widely used if the RMB exchange rate cannot be made more flexible in light of the
impact of exports on the Chinese economy.
RMB buying and selling among non-residents of China are basically unrestricted, and
RMB procured through trades among foreign banks can be used for capital transactions like
direct foreign investment and loans from abroad (foreign debt). Meanwhile, in June 2011 the
People’s Bank of China released a regulation on issues related to cross-border RMB business,
which limited RMB buying and selling between overseas and domestic banks to use for trade
settled within three months. Although there are no problems with repatriating RMB outflows
through various measures to internationalize the RMB, allowing free access to Mainland
Chinese markets and liberalizing cross-border foreign exchange transactions makes it harder
15
to control the RMB exchange rate. Authorities appear to be extremely cautious about such
measures.
Figure 9: USD/RMB Since 2001
（人民元/米ドル）
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
Jan-11
Jun-11
Aug-10
Oct-09
Mar-10
May-09
Jul-08
Dec-08
Feb-08
Apr-07
Sep-07
Nov-06
Jan-06
Jun-06
Aug-05
Oct-04
Mar-05
May-04
Jul-03
Dec-03
Feb-03
Apr-02
Sep-02
Nov-01
Jan-01
Jun-01
4.0
Source: Bloomberg
2‐3．Chinese-Japanese Financial Cooperation
The Chinese and Japanese heads of state agreed at a meeting on December 25, 2011, to
strengthen mutual cooperation in developing the financial markets of both countries. As a
result of the agreement, direct trades between the JPY and RMB were launched on the Tokyo
and Shanghai markets on June 1, 2012. This is one means to promote the internationalization
of the RMB for the Chinese side.
Figure 10: Enhanced Cooperation for Financial Markets Development between Japan and China (Fact Sheet)
To support the growing economic and financial ties between Japan and China, the
leaders of Japan and China have agreed to enhance mutual cooperation in financial
markets of both countries and encourage financial transactions between the two
countries, specifically in the following areas, paying attention to the principle that
these developments should be market-driven.
I. Promoting the use of JPY and RMB in cross-border transactions between
Japan and China.
 Facilitating trade settlement in JPY and RMB to reduce foreign exchange
risks and transaction costs for exporters/importers in both countries; and
 RMB-denominated FDI from Japan to Mainland China, including to
subsidiaries of Japanese companies.
16
II. Supporting the development of direct exchange markets between JPY and
RMB;
III. Supporting sound development of JPY and RMB bond markets.
 RMB-denominated bonds issued by Japanese companies in Tokyo and
other overseas markets; and RMB-denominated bonds issued by Japan
Bank for International Cooperation in mainland China markets as a pilot
program; and
 Application process is underway for the Japanese authority to invest in
Chinese government bonds.
IV. Encouraging the private sector to develop JPY-denominated and
RMB-denominated financial products and services in the overseas markets;
and
V. Establishing “Joint Working Group for Development of Japan-China
Financial Markets” to promote mutual cooperation in the above-mentioned
areas.
In addition, we agreed to accelerate the ASEAN+3 financial cooperation, including
introducing the regional crisis prevention function and further strengthening the crisis
resolution mechanism of CMIM.
Source: MoF.
In the past, when companies made JPY-RMB transactions in Japan, banks often covered
transactions by breaking down the process into two steps: they exchanged JPY for USD, then
exchanged USD for RMB on the foreign exchange markets. Those transaction costs were
settled using cross rates combining JPY and RMB rates versus the USD, while funds
settlements had to be settled in USD.
With the launch of direct JPY-RMB transactions, the spread between bid and offer rates
could shrink without the involvement of the USD in the transaction if the markets are big
enough. This could ultimately result in lower transaction costs for companies. Further, fund
transactions not involving the USD could be possible and financial institutions would face
less risk from time differences. Given these impacts, the start of direct exchange transactions
between the JPY and RMB has been a ground-breaking development.
According to market participants, the Tokyo market now has a trading value of
approximately RMB800mn (equivalent to approximately JPY10.0bn), and trading has
continued to be on that scale. The spread between bid and offer rates appears to have shrunk
compared to when the USD was involved in transactions, as direct trading of the JPY and
RMB appears to have gotten off to a smooth start.
At the same time a new market maker JPY-RMB transaction system was introduced in the
17
Shanghai interbank foreign exchange market on June 1. This was the start of increased direct
trades between the JPY and RMB. Banks designated as market makers release their buy and
sell rates for the JPY and RMB at any given time and must accept deals at those prices.
Further, every morning the China Foreign Exchange Trade System (CFETS), the operator of
the markets, releases the average JPY/RMB rate offered by multiple market makers as the
intermediate value. So far, trades have grown to approximately RMB3.0bn a day, and, as in
the Tokyo market, the transaction spreads appear to be shrinking compared to before.
The Shanghai interbank foreign exchange market initially accepted only five currencies for
trade with the RMB: the USD, EUR, GBP, JPY, and HKD. The MYR was added in August
2010, with the RUB in November 2010, and AUD and CAD in November 2011 following.
However, because of the difficulty in making payments quickly as necessary, trading volume
for currencies other than the RMB and USD has been limited, and more than 99% (of value)
of transactions involve the USD as an intermediary. Although the RMB had been directly
traded only with the MYR and RUB without other currencies as an intermediary, the recent
launch has allowed direct trades with the JPY as a non-USD key currency for the first time.
JPY and RMB trading on the Tokyo market is currently primarily conducted using the
proprietary accounts of Japan’s three megabanks. Increasing customer order trading of the
JPY and RMB will be necessary to further develop the market.
Total imports and exports between Japan and China totaled JPY27.54trn, according to 2011
trade data. Japanese trade with China exceeded trade with the US, and China is Japan’s
biggest trading partner. Trade with China is expected to keep growing. On the other hand, the
bulk of trade settlements between Japan and China is made using the USD, with JPY
settlements comprising approximately 30-40% and settlements in RMB less than 1%. Trade in
JPY and RMB by companies has considerable room for growth. With the start of direct
JPY-RMB trading, there has been an ‘announcement effect’ regarding the usage of RMB,
which has been considered difficult in the past, and the RMB now may feel more familiar.
Financial institutions have received a number of inquiries from client companies. There is
considerable potential demand for corporate activity between China and Japan, beginning
with such trade, and the Tokyo market may be more favorable than other markets.
There are still many regulations concerning RMB cross-border transactions, and this limits
the supply of RMB liquidity in overseas markets aside from Hong Kong. In order to ensure
adequate liquidity of RMB, Mainland China foreign exchange regulations must be eased.
However, Chinese authorities are concerned about the impact on domestic monetary policy
and remain cautious about freely recognizing cross-border foreign exchange trading. Even if
regulations are loosened, the pace of any changes will most likely be gradual.
Even if the private sector is to engage independently in RMB business in order to develop
the Tokyo market, significant progress is unlikely on the efforts of the private sector alone as
18
long as so many regulations covering RMB trading remain. In order to ensure RMB liquidity
on the Tokyo market, schemes must be devised to supplement private liquidity. For example,
the Bank of Japan and People’s Bank of China could conclude a currency swap agreement
with the JPY and RMB, and the RMB must be supplied on the Tokyo market.
There are some views that promoting direct trades of the JPY and RMB and the use of the
JPY and RMB in cross-border transactions would be a double-edged sword that would expand
the use of the RMB in trade between the two countries and also threaten the JPY’s status as a
global currency. However, merely envying China’s hastening internationalization of the RMB
means that Japan will face bleak prospects. The RMB’s internationalization could be new
momentum for both the revitalization of the Tokyo market as well the internationalization of
the JPY, which had foundered in the past.
China and Japan are expected to cooperate financially by further promoting the issuance of
RMB-denominated bonds by Japanese companies on the Tokyo market. A structure that
makes the issuance of RMB-denominated debt on the Tokyo market by Japanese companies
active in China could enable SMEs that are not well-known in China to raise funds at
relatively
low
interest
rates.
As
noted
above,
although
company
issuance
of
RMB-denominated bonds overseas to raise RMB, used to invest directly in Mainland China
and lending (foreign debt for the Chinese side) are already allowed, just how fast funds can be
raised and how smoothly RMB funds can be taken into China calls for the establishment of
procedures and infrastructure in the future. The Japanese Government will have to work with
the Chinese Government on these points.
19
Figure 11: Currency Swap Agreements among Central Banks
Date
2008/12/12
2009/1/20
2009/2/8
2009/3/11
2009/3/23
2009/3/29
2010/6/9
2010/7/23
2011/4/18
2011/4/19
2011/5/6
2011/6/13
2011/10/26
Korea
Hong Kong
Malaysia
Belarus
Indonesia
Argentina
Iceland
Singapore
New Zealand
Uzbekistan
Mongolia
Kazakhstan
Korea
2011/11/22
Hong Kong
2011/12/22
2011/12/23
2012/1/17
2012/2/8
Thailand
Pakistan
UAE
Malaysia
2012/2/21
2012/3/20
Turkey
Mongolia
2012/3/22
The other party
Australia
Total amount
（Unit：RMB100mio）
Amount
1,800
2,000
800
200
1,000
700
35
1,500
250
7
50
70
1,800
（Cumulative total: 3,600）
2,000
（Cumulative total: 4,000）
700
100
350
1,000
（Cumulative total: 1,800）
100
50
（Cumulative total: 100）
2,000
16,512
Source: People’s Bank of China.
3.
The Brazilian Real
As emerging economies—primarily the BRICs—gain more weighting within the world
economy, attention has focused increasingly on the internationalization of emerging economy
currencies. Much of Japan’s concern is with the internationalization of the Chinese RMB, but
the BRL is also steadily internationalizing, albeit at a gradual pace.
3‐1． BRL Currency System and Exchange Rate Developments
Figure 12 tracks the BRL’s value against the USD.
20
Figure 12: USD/BRL
4
3.5
3
2.5
2
1.5
1
0.5
0
Mar-92
Mar-94
Mar-96
Mar-98
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
Source: Compiled from Bloomberg data.
In the early 1990’s, Brazil struggled with hyperinflation, the aftereffect of its huge debt
problem of the 1980’s. The government pegged its currency to the USD as an anchor to
control hyperinflation in 1994. This was known as the Real Plan, and was in fact a crawling
peg system in which the BRL rate against the USD was slowly lowered in response to
inflation. The policy was effective and hyperinflation was finally laid to rest (Figure 13). This
helped to restore confidence in Brazil after the response to the debt problem ended in the
mid-1990’s as economic growth recovered with large-scale privatization intended to minimize
government.
However, the Asian currency crisis beginning in 1997 impacted Brazil, and huge sums of
capital flowed out of the country in 1998. The USD peg system grew difficult to maintain.
The USD peg was abandoned and the BRL allowed to be devalued in early 1999, as Brazil
shifted to a floating rate system without exchange rate bands and target levels. Even in the
early 2000’s, ripples from the Argentine debt crisis spread and Brazil’s economy was unstable.
However, under the Lula Administration that took office in 2003, the central bank introduced
a target inflation rate and an inflation targeting policy framework was implemented in which
interest rates could move flexibly. Confidence in Brazil’s policies surged. Since the late
2000’s, Brazil’s exchange rate has continued to improve overall amidst steady inflows of
capital due to high resource prices and the Brazil boom.
21
Figure 13: Brazil GDP Growth Rate and Inflation (GDP growth – right axis; Inflation rate – left axis)
3,500
8
3,000
6
2,500
4
2,000
2
1,500
0
1,000
▲2
500
▲4
▲6
0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
Source: Compiled by IIMA from IMF data (WEO).
3‐2． Current BRL Use in Trade and the Outlook
Since the latter half of the 2000’s, confidence in Central and South America as a whole has
improved considerably as the region’s macro economy has stabilized. Autonomous
developments have occurred in politics and the economy in the region. For example, from
2005, a joint framework was launched to promote the integration of politics and the
economies of South American countries in 2005, and in 2007 an agreement was reached to
establish a South American bank to support infrastructure development in the region.
Since the global financial crisis in the fall of 2008, emerging economies, especially the
BRICs, have tried to wean themselves off USD dependency amidst efforts to promote
own-country currency settlements in trade. In particular, at the BRICs summit held since 2009,
a move to promote trade settlements in BRICs currencies was promulgated. Within the
Central and South American region, own-country currency settlements began with trade
between Brazil and Argentina in October 2008. This was in line with the BRIC efforts.
Data regarding own-country currency trade settlements between Brazil and Argentina are
discussed below. BRL-denominated export shipments from Brazil to Argentina have been
steadily rising (Figure 14), with aggregate annual shipments totaling approximately 1,200
shipments in 2009, approximately 3,400 in 2010, and approximately 5,000 in 2011. This is
thought to be largely because the BRL-ARS exchange rate has been stable in the
BRL/ARS2.1 to BRL/ARS2.5 range since 2010.
Conversely, ARS-denominated Brazilian imports (ARS-denominated exports for the
Argentine side) have not changed significantly in terms of monthly shipments. This is likely
because Argentina has been isolated from the global financial world throughout the 2000’s
and the ARS has not been used much even in neighboring Brazil.
22
Figure 14: BRL-Denominated Exports (Monthly) and BRL/ARS
(Shipments)
600
3.0
(BRL/ARS)
2.5
Exchange rate (right axis)
500
400
2.0
300
1.5
Monthly exports
200
1.0
100
0.5
0
0.0
oct/08 jan/09 apr/09 jul/09 oct/09 jan/10 apr/10 jul/10 oct/10 jan/11 apr/11 jul/11 oct/11 jan/12
Note: Argentine pesos per Brazilian real.
Source: Compiled from Brazilian central bank website.
Own-country currency trade settlements within Mercosur began between Brazil and
Argentina, and are expected to slowly expand to all Mercosur countries. However,
own-country currency settlements even between Brazil and Argentina are in fact heavily
weighted toward BRL settlements, illustrating the difficulty in increasing own-country
currency settlements for both countries.
Further, even if the BRL is used in trade with other Mercosur countries aside from
Argentina (Uruguay, Paraguay, and Venezuela), the amount will likely be limited. In particular,
Uruguay and Paraguay’s shares of trade are small, in line with the scale of their economies.
Also, even though Venezuela, which only recently officially joined Mercosur, has about the
same amount of exports as Argentina and imports more than Uruguay and Paraguay, it is
tightening external trade. Venezuela is unlikely to use the BRL more in trade. In light of this,
the BRL’s internationalization (in trade) is expected to increase at a gradual pace within
Mercosur, particularly in trade with Argentina.
Figure 15: Trade Volume among Mercosur Member Countries, 2010 (USD mn)
Brazil
Argentina
Exporter
Uruguay
Paraguay
Venezuela
Total Import
Brazil
ー
14,421
1,575
661
455
181,595
Importer
Uruguay
1,531
1,601
ー
1,095
707
12,051
Argentina
18,523
ー
553
538
194
56,502
Source: Compiled from IMF data (DOT).
23
Paraguay
2,548
1,154
140
ー
ー
9,400
Total
Venezuela Export
3,854
201,930
1,424
68,115
336
7,888
110
4,533
ー
65,782
30,744
Further, Brazil’s linkage to China is of particular note in regard to own-country currency
trade settlements. Trade between the two countries ballooned throughout the 2000’s as
Chinese demanded for foodstuffs and mining resources surged and as China provided a stable
supply of cheap goods to Brazil. In 2010, China became Brazil’s biggest trading partner,
surpassing the US and Argentina (Figure 16). China and Brazil have cooperated to expand
trade and investment as relations between the two countries have grown closer.
In June 2012, the heads of both China and Brazil announced the conclusion of a currency
swap agreement (up to BRL60.0bn for Brazil) to tap the currency of the other country. With
trade expected to continue to expand, measures have been introduced to promote and support
settlements with the respective currencies even in trade. But it is unclear just how much the
currencies of the two countries will be used for trade settlements. At present, Brazilian trade
with China is comprised primarily of exports of foodstuff and mining resources and imports
of cheap, labor-intensive manufactured goods.
Natural resource transactions have customarily been denominated in USD. Further, China is
not a nearby country like Argentina, and own-country currency trade settlements are unlikely
because of the physical distance with Brazil. Given these considerations, BRL-denominated
trade settlements with China are unlikely to suddenly surge. But the decision to promote
own-country currency trade settlements with China as part of a cooperative relationship is
worth watching.
Figure 16: Brazil Major Trading Partners and Trade Volume (total imports and exports)
60,000
50,000
40,000
2004
2006
30,000
2008
2010
20,000
10,000
0
China
US
Argentina
Source: Compiled by IIMA from IMF data (DOT).
3‐3．Outlook for BRL Internationalization and Liberalization
The liberalization
of
capital
transactions
is
an
important
condition
for
the
internationalization of a currency, and the inadequate liberalization of China’s capital
24
transactions has been highlighted as a limitation for the internationalization of the RMB. On
the other hand, the high share of securities investments in Brazil’s external debt shows that
capital transactions are being liberalized more than in other emerging countries, and overseas
investors are pouring investments into Brazil because of the appeal of resource-rich country
currencies.
Confidence in the BRL as an investment is gradually building as the country becomes more
open to the outside, even among the Central and South American region. The currency can be
expected to play a role in global investment portfolios as a resource-producing country
currency, like other resource producer currencies the Canadian and Australian dollars.
Further, the use of the BRL in trade has been described above, and the currency’s use by
international organizations and overseas public institutions in capital transactions is expanding
through BRL-denominated bond issuances. Recently, the BRL has been used more frequently
by international institutions and public corporations of advanced economies in official prices
for capital market fundraising (Figure 17).
Figure 17: Recent BRL-Denominated Bond Issuances in Japan
Date
Issuer
Term
August 2012
Sweden Export Credit Bank
6 years
August 2011
Kommunalbanken Norway
3 years
June 2011
HSBC Bank Plc
2.5 years
December 2010
Africa Development Bank
7 years
November 2010
European Bank for Reconstruction and Development
7 years
June 2010
Inter-American Development Bank
2 years
Source: Compiled from various sources.
As substantial amounts of capital have flowed into Brazil in recent years, the BRL has
continued to appear overvalued. Even so, the frequent efforts to open up externally, such as
capital transaction tax treatments to limit the BRL’s rise, have not necessarily been one-way.
Furthermore, the double-edged sword is that a debt-heavy procurement structure––securities
investments––increases the risk of the economy being controlled by the direction of capital
flows.
Because of this, opening up to the outside must balance the risks and merits of promoting
liberalization. On the other hand, Brazil is wholly engaged in the global economy and has
been very cognizant of its role as a leader among emerging economies. Because of this,
opening up to the world and currency internationalization are both irreversible courses.
25
Compared to China’s incremental internationalization and outward liberalization of the
RMB, Brazil’s efforts to liberalize its currency to the world appear to be fast-paced overall.
On the other hand, monetary authorities have alternated between tightening and loosening
regulations in order to manage the BRL’s exchange rate. In this way, the risks and appeals are
still mixed for investors, but the BRL is clearly steadily confirming its position as a leading
emerging economy currency. The internationalization of the BRL will continue to bear
watching.
4.
The Russian Ruble
4-1． The Internationalization and Liberalization of the RUB and the Foreign Exchange
System
(1) The 1998 Fiscal and Financial Crisis
Although Russia unveiled its plans to promote the internationalization of the RUB in 2000
after the inauguration of the Putin Government, the RUB had been gradually expanding its
presence in international financial markets since the breakup of the Soviet Union as the
country’s market economy developed. However, the 1998 fiscal and financial crisis curtailed
progress. Russia’s 1998 fiscal and financial crisis was the first direct hit on the country’s
financial and foreign exchange markets since the 1991 collapse of the Soviet Union and birth
of Russia and after the economy shifted to a market economy. The cause of the crises was the
heavy dependence of Russia’s economy on natural resources. The country depended on
natural resources for the bulk of its exports, and primary goods prices dropped in the 1990s
amidst a worldwide disinflation trend. Tax revenue derived from export revenue shrank, and
Russia’s fiscal balance continued to deteriorate. Furthermore, the Asian currency crisis from
1997-1998 caused worldwide demand to weaken, and commodities prices, primarily oil prices,
plunged, causing the fiscal balance to expand. Thereafter, investment funds from abroad
shrunk as investors increasingly sought safety. As a result, in August 1998, Russia was forced
to: 1) devalue the RUB, changing the target market range of the RUB against the USD to
USD/RUB5.25-USD/RUB7.15 through the end of the year; 2) freeze payments of external
debt for commercial capital transactions for 90 days; and 3) halt the redemption of sovereign
debt, converting short-term sovereign debt scheduled for redemption through the end of the
year to new sovereign bonds. This exacerbated the country’s economic chaos. Thereafter,
Russia was able to emerge from the crisis relatively quickly. The biggest contributing factor
behind the recovery was rising oil prices as the global economy recovered from 1999 to 2000.
In this way, Russia represents a resource-dependent economy, supported by its wealth of
26
commodities. The presence of the RUB on domestic and overseas foreign exchange markets
has been controlled by the direction of primary goods prices. Because oil prices have a big
impact on the country’s trade balance, oil prices and the RUB’s exchange rate are very highly
correlated. After the 1998 crisis, the RUB plunged in value and the currency’s presence on
international financial markets diminished. Further, following this development, Russia’s
government is believed to have recognized the danger of liberalizing capital transfers so
quickly to be out of step with the development of domestic financial markets.
(2) Changes in the Foreign Exchange System
On the other hand, the RUB, which had been pegged to the USD, was put under a managed
float system in 1998 because of the financial crisis. The managed float exchange rate system
has been maintained since then. However, under Russia’s managed float system, relatively
flexible market movements that usually occur with the system have not been apparent; in fact,
a fixed exchange rate policy seems to have been implemented with the intervention of the
central bank. Furthermore, in November 2010, the Russian central bank noted in its 2011
Monetary Policy Guidelines that the currency system was shifting to a completely free float
system, announcing the RUB’s shift to a floating market system. However, even after the shift
to the floating rate, the central bank has an obligation per se to continue to protect the RUB
and stabilize exchange rates, and has actively intervened to maintain its policy of maintaining
the RUB’s rate against a basket of currencies (comprised of rates against the USD and EUR)
to within a given level.
Figure18: USD/RUB
40
35
30
25
20
15
Global Financial Crisis
10
5
Russian Fiscal and Financial Crisis
0
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
（year）
Source: Russian central bank website.
27
4-2． Current Status of the RUB’s Internationalization
(1) Use of the RUB in External Transactions
Statistical data shows that the ratio of RUB-denominated transactions in overall trade is less
than 4%, extremely small. However, most trade with the CIS countries––with which Russia
has had highly interdependent relationships since the collapse of the Soviet Union and which
comprise 10% of all Russia’s trade––is denominated in RUB. Note that according to Russian
financial institutions, a relatively large 30% of services transactions are denominated in RUB.
Among CIS countries, the ratio jumps to 50%.
Figure 19: Ratio of RUB-Denominated Trade by Country
2006
2007
2008
2009
（％）
2010
Russia
3.7
3.9
3.7
3.8
3.9
Belarus
28.0
28.7
27.0
26.2
30.4
Kazakhstan
11.1
12.2
8.5
7.6
8.2
Kyrgys and Tajikistan
11.8
10.3
12.0
12.1
10.8
Source: Compiled by IIMA from VTB Capital Research.
Furthermore, the amount of RUB traded on world foreign exchange markets has tripled in
ten years, but the weighting overall remains extremely small compared to major currencies
like the USD and EUR. The RUB is used in less than 1% of total foreign exchange
transactions, less than the rate of use in trade transactions. This suggests that the ratio of
RUB-denominated transactions is small also in capital transactions.
28
Figure 20: Transactions by Currency on World Foreign Exchange Markets
Currency
US dollar
Euro
Japanese yen
Pound sterling
Australian dollar
Swiss franc
Canadian dollar
Hong Kong dollar
Singapore dollar
Mexican peso
Indian rupee
Russian Rouble
Chinese renminbi
Brazilian real
Other currencies
All currencies
1988
2001
86.8
...
21.7
11.0
3.0
7.1
3.5
1.0
1.1
0.5
0.1
0.3
0.0
0.2
63.7
200.0
2004
89.9
37.9
23.5
13.0
4.3
6.0
4.5
2.2
1.1
0.8
0.2
0.3
0.0
0.5
15.7
200.0
2007
88.0
37.4
20.8
16.5
6.0
6.0
4.2
1.8
0.9
1.1
0.3
0.6
0.1
0.3
15.9
200.0
85.6
37.0
17.2
14.9
6.6
6.8
4.3
2.7
1.2
1.3
0.7
0.7
0.5
0.4
20.0
200.0
2010
84.9
39.1
19.0
12.9
7.6
6.4
5.3
2.4
1.4
1.3
0.9
0.9
0.9
0.7
16.6
200.0
Note: Total is 200% because every transaction is counted for both currencies.
Source: BIS.
(2) Offshore Markets
Issuance of RUB-denominated bonds in offshore markets is low compared to
JPY-denominated and RMB-denominated bonds. Although CIS country Belarus issues debt
denominated in RUB, Russian companies issue only a very small amount of
RUB-denominated
corporate
debt
overseas.
Most
debt
issuances
are
USD-
or
EUR-denominated, and local financial institutions report that bond market infrastructure,
including custodian, issues persist. At present, the cost of issuing RUB-denominated bonds is
much higher than for EUR-denominated bonds, and some feel that the cost is far from fair to
issuers. Lowering custodian and settlement costs will be tasks in increasing issuances on the
EUR bond market.
(3) Opening Financial Institutions to Foreign Capital
The presence of foreign financial institutions is increasing in Russia’s banking sector, and
this is critical to promoting the use of the RUB among foreign companies and investors. The
number of foreign participating banks in Russia stood at approximately 130 from 2000 to
2005, but then started to rise markedly in 2006. Thereafter, the number started falling from
2010 because of the impact of the global financial crisis, then once again began to rise,
reaching 237 banks in July 2012. The weight of foreign capital among total capital for banks
overall continues to rise.
In this way, the presence of foreign-affiliated financial institutions has expanded primarily
29
because of the increase in foreign manufacturers and services companies penetrating Russia
because of the economy’s solid growth. Figure 21 shows direct inward investment into Russia
and the number of foreign participating banks. Over the past 10 years, because the Russian
economy has been fairly strong, more foreign capital has poured into Russia. Because of this,
the number of foreign-affiliated banks has increased.
The second reason for the increase in foreign-affiliated banks is limited entry regulations
for foreign-affiliated banks. Russia is expected to further ease regulations as the country joins
the WTO and the share of foreign-affiliated bank capital in total bank capital is raised to 50%
from 12%. Further, foreign-affiliated banks are currently not allowed to open branch offices in
Russia, and this is expected to be addressed as Russia negotiates entry into the OECD and in
the WTO multilateral trade negotiations.
Figure 21: Russia Inward Direct Investment and Foreign Participating Banks
（Mil US dollar）
80000
260
FDI inflows（right scale）
240
70000
the number of foreign banks
（left scale）
220
60000
200
50000
180
40000
160
30000
140
20000
120
10000
100
0
00
01
02
03
04
05
06
07
08
09
10
11
12
Source: Russian central bank website, UN UNCTAD World Investment Report 2012.
4-3． The RUB’s Internationalization and Liberalization: The Outlook
(1) Liberalization of External Transactions toward Internationalizing the RUB
The internationalization of the RUB took on national policy status with the inauguration of
the Putin Government in 2000, but the currency had already been liberalized in 1996 for
current transactions in terms of easing regulations and liberalizing use of the RUB in external
transactions. Also, capital transactions were freed in 2006, at an earlier stage than in other
major emerging economies. In particular, the Foreign Currency Management Act was
overhauled in July 2006, and various regulations related to capital transactions were abolished.
Notably, this was the fastest such move among BRICs countries. Furthermore, with the
accession of President Medvedev in 2008, making the RUB an international reserve currency
became an official policy objective. However, this has not caused the RUB’s presence in
international financial markets to expand, such as in more current and capital account
30
transactions. On the other hand, even though the RUB is not a sufficiently convertible
currency, transactions did begin in 2010 under a floating exchange system.
Figure 22: Internationalization of the RUB: Developments
Jun. 1996
Current account transaction is liberalized.
Jul. 2006
Capital account transaction is liberalized.
RUB becomes fully convertible.
Nov. 2010 Free float of the RUB is introduced.
Dec. 2010 Direct conversion of CNY/RUB is introduced.
Belarus issues sovereign bonds denominated in RUB.
Source: Compiled by IIMA from VTB Capital Research.
(2) The 2008 Global Financial Crisis and the Internationalization of the RUB
The global financial crisis triggered by the collapse of Lehman Brothers in September 2009
spread to Russia, as financial markets were shaken and the economy stalled for some time.
The main reason the economy started to deteriorate was, as with the 1998 fiscal crisis, demand
for primary goods plummeted throughout the world because of the financial crisis, and prices
of commodities like oil plunged. Further, the abolition of capital transaction regulations in
July 2006 had a big impact, as it did with the financial markets. Russia’s commercial capital
transactions became free in principle, and because of a structure that made capital inflows and
outflows easy, capital inflows from abroad decreased and capital outflows from inside the
country increased. Financial and capital market fluctuations surged, with stock prices and
exchange rates plunging. Thereafter, various efforts by the government and central bank—like
monetary easing, uncollateralized financing to banks, tax cuts, and industrial fiscal
support—took effect, and the economy started to recover.
However, the adverse impacts of the 2008 financial crisis were, ironically, even bigger than
the impacts from the 2006 measures to liberalize capital transactions implemented in order to
internationalize the RUB. The 2008 impacts once again slowed those movements. Confidence
in the USD and EUR declined because the US and the eurozone were the epicenters of the
financial crisis, , but the RUB was not able to fill the gap in confidence.
(3) Start of Direct RUB-RMB Exchanges
Amidst such developments, an important step in the internationalization of the RUB was
the start of direct trading between the RUB and RMB on December 15, 2010, on the Moscow
31
and Shanghai markets. Direct trading between the RMB and JPY began in Tokyo and
Shanghai in June 2012, but the direct RMB and RUB trades had already begun more than a
year before. Although the scale of trading is still limited, average trading volume grew by five
times through the year, to RUB1.3 million. Trading volume grew to RUB2 million
(approximately JPY4.8 million) by mid-2012 as the market surged in size. Russia imports
large volumes of manufactured goods from China. In particular, some local companies feel
that RUB-RMB trading offers big potential merits for large importing companies that
purchase equipment from China in large amounts.
(4) The RUB’s Internationalization and Liberalization: The Outlook
① The Natural Resource-Dependent Economy Obstructing the RUB’s Internationalization
As noted above, Russia’s heavy reliance on natural resources has become an impediment
for the two reasons described below as the RUB grows in stature as an international currency.
First, natural resources comprise the bulk of Russia’s exports and are commonly
denominated in USD. One attribute of Russia’s economy is that mining and energy industries
comprise a big share of the economy, but compared to the other BRICs, the share of such
goods among Russia’s exports is an extremely high 70% (Figure 23). If these goods are
customarily denominated in USD, it would be difficult to raise the ratio of RUB-denominated
exports within exports overall.
Figure 23: The Economy’s Dependence on Natural Resources (2010)
(%)
80
The share of fuel and mining industries
in nominal GDP
The share of fuel and mining
products in exports
70
60
50
40
30
20
10
0
Russia
Brazil
China
India
Russia
Brazil
China
India
Note: Secondary industries minus manufacturing industry, using GDP fuel and mining value-added prices.
Source: World Bank, World Development Indicators.
Second, the RUB is prone to fluctuations because of shifts in the commodities market,
primarily oil prices, and may not win the confidence of foreign investors. The RUB has
32
repeated a cycle of rising when natural resource prices jump, exports are strong and foreign
investors wish to hold the currency, then falling when natural resource prices drop and
investors have less desire to hold the RUB. Because of this, it is difficult to maintain
confidence in the RUB to expand the use of the currency in trade and investment and as a
reserve currency over the long term.
② A Shift in Economic Structure Needed
In internationalizing the RUB, Russian industry must become more advanced and the
country’s natural resource-dependent economic structure must change in order to increase the
use of the currency in trade, raise confidence in the RUB as a currency, and boost usage in
overseas direct investing and securities investment as well as in holdings as a reserve currency.
In order for this to happen, industrialization is the key, especially manufacturing.
Sophisticated production technology must be introduced by aggressively promoting foreign
capital, and an industrial society that is competitive internationally must be developed. Russia
is adopting this as a national policy.
Russia is expected to increase its ties with the international community, but also to become
a society and investment destination more in line with international standards with its
accession into WTO in 2012. Moreover, as automobile maker exports (primarily Japanese),
the Skolkovo Innovation Center outside Moscow, and the IT park near Kazan have shown, the
country is making strides toward developing equipment manufacturing and high-tech industry.
Although energy-related exports like oil and natural gas have been strong because of the
recent high oil prices and the country has been developing its resources, Russia’s economic
structure must steadily shift to more sophisticated production and not be overly dependent on
these sectors.
On the other hand, as industry becomes more sophisticated, purchasing power is expected
to rise at the same time. If the Russian markets grow like the US and Japanese markets in the
future, the country will be able to use its bargaining power with overseas sellers and expand
RUB-denominated import transactions. This is expected to increase the usage of the RUB
both on the export and import sides.
③
The RUB to Gradually Internationalize
That said, although these are the bases of important strategy and issues that should be
addressed over the medium- to long terms, they are not problems that can be solved in the
short run. Therefore, strategies that will have an immediate effect are the key. For example,
bolstering the supply of RUB liquidity with currency swap agreements with countries with
33
which Russia has strong economic relationships would likely be effective. In particular, not
only concluding a currency swap agreement with and supplying funds in times of crisis to
China—an important trading partner and with which direct currency exchanges have already
begun—but also using the RUB as a trade and investment settlement currency during ordinary
times would likely facilitate the use of both countries’ currencies and increase direct trades.
At the same time, Russia must deepen its dealings not only with major trade and investment
partner CIS countries, but also Asia, primarily in the Far East. Relations through trade and
investment have already reached a certain level with these regions, primarily China and Japan,
but Russia must develop even tighter relations, especially in the Far East.
Dealings with the CIS countries have been thought to be important in the
internationalization of the RUB. Although use of the RUB in external transactions has been
limited overall, the RUB has been used widely in trade and investment activities with the CIS
because of their shared history in the Soviet Union. But considering government aims and the
importance of business, expanding the use of the RUB in the Pacific and Far East regions,
with which Russia is expected to have even greater economic interdependence, will be an
issue.
In this way, assuming that Russia’s economic structure changes, however, gradually, the
RUB is expected to internationalize at a moderate pace, primarily with the CIS countries and
the Far East. Risk factors here may include failing to make a shift in an economic structure
that is dependent on natural resources like mining and energy products.
5.
Summary and Outlook
As described above, three emerging economy currencies—the RMB, the BRL, and the
RUB—are expected to internationalize in their respective neighboring regions with which the
home country has a high degree of economic interdependence: the RMB in East Asia,
primarily Hong Kong and Japan; the BRL in Argentina; and the RUB in the CIS countries.
The linkages among these countries have been strengthening through forums like BRICS
summits, and their presence as a core of emerging countries will grow in the world economy,
The roles of the RMB, BRL, and RUB will consequently rise in international financial
markets. However, it is unlikely that these currencies will supplant the USD in the
international currency system, and the USD is expected to retain its role as a key currency
even as its status declines. For now, the current structure with multiple international
currencies—the USD, the EUR and JPY as well as major emerging economy currencies like
the RMB—is expected to persist.
On the other hand, although the JPY has established its status as the sole international
currency in Asia, the currency’s internationalization has not been commensurate with the size
34
of the economy as an advanced nation. However, Asia Pacific region emerging economy
powerhouses—major Japanese economic partners China and Russia—are aiming to
internationalize their currencies, and these developments may cause changes. Already, not
only have financial cooperation agreements with China been reached and direct settlements
between the JPY and RMN started, but Japanese companies are expected to issue
RMB-denominated bonds on the Tokyo market. In addition, Russia and China have already
begun direct exchanges of their currencies and are expected to seek further mutual
cooperation in financial and foreign exchange transactions. As such, Japan is expected to not
only conclude more currency swap agreements and supply funds during times of crisis with
the two countries, with which Japan is expected to become more interdependent, but to also
promote the use of both currencies by encouraging their use as settlement currencies in
ordinary trading. Japan can help with the internationalization of the currencies of both
countries by supporting China—which still restricts financial and capital markets and external
transactions—and Russia—whose domestic financial and capital markets development is
inadequate.
Furthermore, increased deposits and bond issuances in the currencies of other countries in
offshore markets would likely contribute to the stability of regional financial markets and the
currency system. This could result from greater mutual financial cooperation with other
Asia-Pacific emerging economies through APEC, while the Asia Bond Market Initiative
would also promote bond issuances by developing regional bond markets. In this way, the
internationalization of the JPY, which has hit one wall, could once again have room for
success.
35
References
Chapter 1
Ministry of Finance Study Group for the Promotion of the Internationalization of the JPY,
“Promoting the Internationalization of the Yen,” January 2003.
Institute for International Monetary Affairs, “The Internationalization of the Yen,” survey
undertaken for Bank of Tokyo-Mitsubishi, February 1999.
Kobayashi, Masahiro and Nakabayashi Shinichi, Deciphering the World Economy through
Currencies, Chuko Shinsho, 2010.
Nomura Institute of Capital Markets Research,” Survey on Developments in the
Internationalization of the RMB,” undertaken for MoF, December 2009.
Barry Eichengreen. Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of
the International Monetary System, Oxford, 2011.
Samar Maziad, Pascal Farahmand, Shengzu Wang, Stephanie Segal, and Faisal Ahmed.
“Internationalization of Emerging Market Currencies: A Balance between Risks and
Rewards,” IMF Staff Discussion Note, 2011.
Xu Qyuan. “A Study of Currency Internationalization on: JPY and CNY,” Fukino Project
Discussion Paper Series No.013, (2009).
Chapter 2
Tsuyuguchi Yosuke. “Start of Direct JPY-RMB Trading Furthers Distancing from China and
USD Dependency,” Nikkei Shimbun, July 7, 2012.
Meguro Katsuyuki. “Japan-China Financial Cooperation and Direct JPY-RMB Trading,”
Kinyu Zaisei Jijo, July 23, 2012.
Bank of Tokyo-Mitsubishi UFJ. Economic Review: The Internationalization of the RMB and
China’s Currency Strategy, April 26, 2012.
Sekine Eiichi. “The Dawn of a New Financial Cooperation Age between China and Japan –
Leaders of Both Countries Meet,” The Nomura Foundation China Capital Markets Research,
Spring 2012.
Nishimura Kiyohiko. “Asian Markets at a Crossroads” (speech), BoJ, February 8, 2012.
Robert McCauley “Renminbi internationalization and China’s financial development” BIS
Quarterly Review, December 2011.
IMF Staff Discussion Note, “Internationalization of Emerging Market Currencies: A balance
between Risks and Rewards,” October 9, 2011.
36
Chapter 3
Banco Central de Brazil
SML – Local Currency Payment System http://www.bcb.gov.br/?SMLE
IMF database
BOP (Balance of Payment Statistics)
DOT(Direction of Trade Statistics)
WEO(World Economic Outlook)
JETRO website: http://www.jetro.go.jp/world/cs_america/br/trade_04/
Matsui Kenichiro. “The Internationalization of the Brazilian Real – Distancing from the
Dollar in Central and South America,” IIMA, Financial Topics No. 208, November 9,
2011.
http://www.iima.or.jp/Docs/topics/2011/208.pdf
__”Central and South America Build Reserves to Distance from US Dollars”, IIMA,
Financial Topics No. 214, April 6, 2012.
Chapter 4
Sugano Tetsuo. “Russia and the Ruble”, Kaigai Jijo, February 2003, Takushoku Daigaku
Kaigai Jijo Kenkyusho, February 2003.
Andrei Kostin. “Internationalization of the Russian Ruble”, VTB and ABAC Russia, 2012.
Johannes P. Jutting and Juan R. de Laiglesia. “Is Informal Normal? Toward More and
Better Jobs In Developing Countries,” OECD Development Centre Perspective, 2009.
This report is intended only for information purposes and shall not be construed as solicitation to
take any action such as purchasing/selling/investing financial market products. In taking any action,
each reader is requested to act on the basis of his or her own judgment. This report is based on
information believed to be reliable, but we do not guarantee its accuracy. The contents of the report
may be revised without advance notice. Also, this report is a literary work protected by the
copyright act. No part of this report may be reproduced in any form without express statement of its
source.
Copyright 2012 Institute for International Monetary Affairs (IIMA)（公益財団法人 国際通貨研究所）
All rights reserved. Except for brief quotations embodied in articles and reviews, no part of this publication may be
reproduced in any form or by any means, including photocopy, without permission from the Institute for International
Monetary Affairs.
Address: 3-2, Nihombashi Hongokucho 1-Chome, Chuo-ku, Tokyo 103-0021, Japan
Telephone: 81-3-3245-6934, Facsimile: 81-3-3231-5422
〒103-0021 東京都中央区日本橋本石町 1-3-2
電話：03-3245-6934（代）ファックス：03-3231-5422
e-mail: [email protected] URL: http://www.iima.or.jp
37